Analysis: Crypto firms scramble for banking partners as willing lenders dwindle

Analysis: Crypto firms scramble for banking partners as willing lenders dwindle

LONDON, April 19 (Reuters) – Crypto firms have been scrambling to find banking partners following the collapse of three crypto-friendly lenders in the United States last month, raising a risk that their business will be concentrated in smaller financial institutions.

It’s a scenario that worries U.S. regulators, who have expressed doubts about the safety and soundness of banking business models heavily focused on crypto customers after Silvergate Capital Corp ( SI.N ), Signature Bank and Silicon Valley Bank imploded.

US regulators have also asked banks to be alert to liquidity risks arising from crypto-related deposits, which could be subject to rapid outflows if customers try to redeem crypto-assets for real money.

Mainstream banks have become increasingly wary of crypto customers following a series of high-profile collapses, including the bankruptcy of major exchange FTX last November, and a lack of regulation.

“Crypto and Web3 start-ups are telling us they simply can’t get a business bank account,” said Marcus Foster, head of crypto policy at Coadec, a body representing UK start-ups. Foster said the problem has gotten “significantly worse” recently.

This has left digital asset companies with little choice but to seek out smaller financial institutions, some in more remote corners of global finance.

A spokesperson for FV Bank, a U.S.-licensed fintech-focused bank in Puerto Rico, said it has seen an increase in inquiries from potential customers in recent weeks, even though it is not insured by the Federal Deposit Insurance Corp. The bank does it. do not lend and are therefore not subject to the same type of risk as traditional banks operating on a fractional reserve system, a spokesperson said.

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In Liechtenstein, a spokesperson for Bank Frick said it has also experienced a “significant increase in account opening requests,” with the bulk of inquiries coming from firms in Europe, Singapore and Australia.

However, the bank is not purely focused on crypto and has a broadly diversified business model, the spokesperson said.

Switzerland-based Arab Bank told Reuters in March that it had seen an increase in US firms, mostly crypto funds or those involved in crypto venture capital, seeking to open accounts, but that the bank was unlikely to accommodate them all.

While Hong Kong’s ZA Bank, a digital bank, said it had seen about four times more inquiries from crypto firms seeking accounts after the collapse of Silicon Valley Bank, although it said it would only accept firms licensed to trade virtual assets.

Nikki Johnstone, a partner at Allen and Overy law firm in London, said the “concentration risk” that comes from a growing number of customers seeking business from the smaller firms is the “biggest challenge” of having reduced crypto banking options.

“It puts a higher level of expectation that the firm is using the right level of risk management and monitoring,” she said.

Cryptocurrency companies need access to banks to hold their customers’ dollar deposits and for day-to-day business activities.

“Of course, the motto of crypto is ‘we’re going to replace the banks,’ but firstly, we’re not there yet, and I don’t think we’ll ever be there,” said Paolo Ardoino, chief technology officer. of Tether, the largest stablecoin by market capitalization, whose reserves have previously been the subject of investor scrutiny.

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Several top banks told Reuters they are currently turning away most potential crypto-related clients, while others said they only work with top-tier firms — policies that most say are unchanged from their historical positions.

JPMorgan Chase ( JPM.N ) is not onboarding any clients that are primarily crypto businesses anywhere in the world, according to a source familiar with the situation, with the exception of a select few firms including Coinbase ( COIN.O ), which has disclosed that it deposits customer funds in the bank.

The person said this policy has long been its position.

A source familiar with Bank of New York Mellon ( BK.N ) said that while the bank investigates any crypto company that seeks to become a client, it is “very, very rigid” in its review process and has only taken on clients . from case to case. Circle, the main issuer of USD Coin, keeps part of its reserves with BNY Mellon.

An ING spokesperson said the bank does not “actively target or focus on crypto firms,” ​​so its exposure is “very limited.”

Allen and Overy attorney Johnstone said banks are often cautious because of the increased money laundering risk in the crypto sector and a lack of robust crypto regulation.

To be sure, some of the biggest cryptocurrency companies have ongoing relationships with US banks. Circle, the main issuer of USD Coin, deposits part of its reserves with Customers Bank, and Gemini says it deposits the reserves of its stablecoin with State Street Bank and Goldman Sachs ( GS.N ). Coinbase has revealed that it is depositing customer funds at Cross River Bank in addition to JPMorgan Chase.

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But for smaller crypto start-ups, securing a banking partner can be more difficult, said Ricardo Mico, U.S. chief executive of Banxa ( BNXA.V ), a provider of payments and compliance infrastructure for crypto.

“There is certainly a concern about the lack of banking partners available in the market now, especially for the smaller and less proven ventures,” he said.

Reporting by Elizabeth Howcroft in London and Hannah Lang in Washington; additional reporting by Mehnaz Yasmin and Georgina Lee; Editing by Elisa Martinuzzi and Sharon Singleton

Our standards: Thomson Reuters Trust Principles.

Elizabeth Howcroft

Thomson Reuters

Reports on the intersection of finance and technology, including cryptocurrencies, NFTs, virtual worlds and the money that powers ‘Web3’.

Hannah Long

Thomson Reuters

Hannah Lang covers financial technology and cryptocurrency, including the businesses that drive the industry and the policy developments that govern the sector. Hannah previously worked at American Banker where she covered banking regulation and the Federal Reserve. She graduated from the University of Maryland, College Park and lives in Washington, DC.

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